Reflection on budget 2012 from the perspective of SME's
07 May 2012
Posted by: SAIT Technical
By David Warneke (BDO Tax Flash May 2012)
BDO has described the 2012 budget as a 'robin hood budget', in that taxpayers at the lower end of the Income Tax scales benefitted at the expense of those at the upper end. The South African public have become accustomed to this over the years. There were also, inevitably, some curveballs. In this article David Warneke, Income Tax technical partner at BDO South Africa, reflects on the 2012 budget in the context of small and medium sized business.
Dividends tax came into effect on 1 April 2012, as had been widely gazetted some months before budget day. However, the increase in the rate from 10 % to 15 % took everyone by surprise. Even after the increase in rate, the fiscus anticipates a loss from the dividends tax (largely as a result of the exemption of dividends paid to retirement funds from the tax). Dividends tax is a foreign investor-friendly tax compared to secondary tax on companies (STC) in that double taxation agreements recognise dividends tax for purposes of rate reduction. STC was additionally a tax on a company that declared a dividend rather than on the shareholder receiving the dividend and this made South African companies results appear uncompetitive when compared with those of foreign companies. However, where these considerations do not come into play, for example, in the case of most South African SME's, there has been a flurry of dividend declarations prior to 1 April 2012 in order to have the declaration of profits subject to STC at 10 % rather than the dividends tax at 15 %.
The increase in the capital gains tax inclusion rates from 25 % to 33.3 % for individuals and special trusts, and from 50 % to 66.6 % for companies and ordinary trusts was also unexpected but ties in with statements made regarding the reduction in opportunities for arbitrage between revenue and capital gains. If one takes the dividends tax at 15 % into account (even though technically it is not a tax on the company declaring the dividend), then we have seen a massive jump in the effective rate of tax on capital gains, from 21.8 % to 30.8 %, in the case of a company. This is an increase of 41 %. The effective rate of capital gains realised in trusts also increased, from 20 % to 26.4%. Distributions from trusts are not subject to dividends tax. It is now significantly worse to realise capital gains in a company than in a trust.
Significant relief was also granted to 'small business corporations' as defined that are subject to tax in terms of section 12E of the Income Tax Act. There was a significant relaxation in the tax tables applicable to such corporations. For example, at a level of R350 000 of taxable income, the attributable income tax decreased by approximately R18 000 per annum. The income tax tables applicable to 'micro businesses' registered on the turnover tax in terms of the Sixth Schedule to the Income Tax Act also came in for meaningful revision. Extremely few taxpayers have opted to be taxed on the turnover tax system and an effort is being made to popularise it. It has further been proposed that a single return form will in future be used for turnover tax, VAT and employees' tax.
The capital gains tax exemption for the disposal of small business assets as defined in paragraph 57 of the Eighth Schedule has been significantly broadened. Firstly, the quantum of the gain that may be exempted has increased from R900 000 to R1.8 million (per lifetime of an individual). Secondly, the maximum market value of assets for a business to qualify as a small business asset has increased from R5 million to R10 million.
It is of concern that the issue of the removal of the interest exemption for natural persons (R22 800 for taxpayers under the age of 65 years and R33 000 for taxpayers aged 65 years and older) appears to be on the table again. In its place it appears as if tax preferred savings and investment vehicles will be introduced with effect from April 2014. The idea seems to be that growth in value in these vehicles will be tax free in the hands of the investors, with withdrawals also being tax free. Mingy contribution limits have been proposed: R30 000 per annum with an overall lifetime maximum of R500 000. The replacement of a R22 800 exemption with an exemption for growth achieved on R30 000 is not a bargain for taxpayers. After all, how much growth can be expected on an investment of R30 000 -R3000 per annum (at an optimistic 10 %)? Furthermore, the interest exemption currently assists the owners of smaller businesses who earn interest on their loan accounts. I hope that the interest exemption is retained and that if preferred savings and investment vehicles are introduced, that it will be in addition to and not as a replacement for the interest exemption. Encouraging savings should be an urgent priority. A discussion document is meant to be coming out in May which will hopefully provide more clarity on the proposal.
The Minister also proposed that 'special economic zones' would qualify for special incentives. These incentives could include a reduction in tax rates, tax exemptions for operators and additional deductions, over and above salary costs for employees earnings below a certain level. It is unclear what is meant by 'special economic zones' and to what extent they would differ from 'industrial development zones'. More clarity will no doubt be provided by the draft legislation when it is released.
As usual, so-called 'sin taxes' came in for stick. The tax on wine increased from R2.32 to R2.50 per litre, and tax on sparkling wine from R6.97 to R7.53 per litre. One must surely ask why the tax on sparkling wine should be three times that on ordinary wine. After all, sparkling wine is not always imported, or a luxury item in comparison to ordinary wine.